Will a Major Drive Unit Problem Decimate Tesla Motors, Inc.?

Tesla Motors' stock may be flying high now, but it could be about to crash and burn.

On June 22, 2012, Tesla Motors(NASDAQ:TSLA) delivered its first Model S, and since then, the car has received high praise and numerous accolades -- Consumer Reports even rated the Model S at a near perfect score of 99 out of 100. What's more, Tesla Motors' stock has risen precipitously since 2012, and as of this writing, it sits at $215.40 a share. That's the good news.

The bad news is that after being road-tested for the past few years, the Model S is starting to show some major flaws, and that could have a direct impact on Tesla Motors' stock price. Here's what you need to know.

Edmunds.com's Long-term road test In February, 2013, Edmunds.com purchased a 2013 Tesla Model S Performance for the sole purpose of being able to test the car for an extended period of time. For the first 5,000 miles, everything was relatively exceptional, except for a few minor issues. However, over the subsequent months, Edmunds.com journalists detailed their experiences with the Model S, and the results were not what one would hope for, or expect.

By 18,822 miles, the Model S had experienced myriad problems, including prematurely worn tires, a broken sunroof, the battery had to be replaced, and the drive unit had to be replaced -- twice.

By 30,160 miles, the problems with the Model S had only increased, and when Ronald Montoya, consumer advice editor at Edmunds.com, took the Model S in to be serviced, the technician informed him that the noise he heard was what's known as a "milling sound," and indicated that the drive unit needed to be replaced... again.

Also, while Montoya believes that early Model S drivers are "essentially beta-testing the car" and thus are less likely to be "scared off by all the repairs," he admits that Tesla Motors needs to "get these quality issues under control," and that for someone who just wants a "stylish EV to replace a luxury sedan," the maintenance requirements for the Model S are off-putting.

Considering that Tesla Motors' site claims: "With just one moving piece in the motor, compared to hundreds in a gas engine, there are fewer things that can go wrong. That translates to less maintenance and service over time," the road test results above aren't the best news.

Not a unique problem If Edmunds.com's problems with its Model S were an outlier, it'd be easy to say this singular car is a "lemon." Unfortunately, when MotorTrend.com also tested the Model S, it too had to have the drivetrain replaced. Plus, as insideevs.com points out, the technician who diagnosed the problem did so by ear after only a block and a half of driving. And, when one reads the comments on the Edmunds.com article, or TeslaMotors.com'sforums, it's clear that numerous Model S owners are experiencing the same problem with the drive unit, meaning that the issue is not unique, nor is it limited to the Performance model.

Tesla Motors Model S. Source: Tesla Motors.

Furthermore, autoguide.com reports that Consumer Reports downgraded the 2013 Model S's reliability score to "below average," due to owners reporting more problems (the combined score from the 2012 and 2013 models years is "average"), and TrueDelta.com also reports that Model S owners are reporting "high repair frequencies." In fact, Michael Karesh, TrueDelta.com's founder, stated that the Model S "requires three times as much service as the typical vehicle in his survey," according to autoguide.com.

What this means When it comes to drive unit problems, there are a number of concerns, but four seem especially important for investors.

First, it could be argued that Tesla Motors is simply experiencing growing pains, and that it'll get its drive unit issues sorted out. However, Tesla Motors stock is especially volatile when it comes to issues with its vehicles -- as was seen with the sell-offs after battery fires were reported -- and a drive unit that only lasts around 10,000 miles is a big issue (cleantechnica.com estimates that the out-of-warranty replacement cost for consumers is around $15,000).

Second, because a number of Model S owners are reporting that the drive unit needs to be replaced around the 10,000-mile mark, that could indicate a design flaw, and not simply a manufacturing issue. If that's the case, a Model S recall would likely be needed, which could prove quite costly to Tesla Motors.

Third, Tesla Motors' guarantees the resale value of the Model S when it's financed through one of Tesla Motors' specified commercial banking partners. For the first quarter of 2014, that guarantee was given to "an additional 1,181 Model S deliverers," and it's expected to increase in the future. If the reliability of the Model S continues to decline, that could have a direct impact on resale value. If that happens, there could be a significant uptake on this program, and according to Tesla Motors, that "could have a significant adverse impact on our near term GAAP revenues and operating results."

Finally, while warranty costs are something every vehicle manufacturer has to deal with, because Tesla Motors is currently only manufacturing one vehicle, a rapid increase in claims on the Model S could have a more pronounced impact on its bottom line, especially as it's failed to be profitable on a GAAP basis (except for the first quarter of 2013), and its non-GAAP EPS for Q1 2014 was $0.12. Consequently, Tesla Motors' drive unit issue is something to watch.

Katie Spence has no position in any stocks mentioned, nor has she ever held a position in Tesla Motors. The Motley Fool recommends Tesla Motors. The Motley Fool owns shares of Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Author

Katie Spence has been a financial journalist for The Fool since 2011. She specializes in defense companies, “green" technology, autos, and robots. Follow me on Twitter for breaking news in the defense, auto, and robot industry. Follow @tmfkspence